Consolidation of microfinance institutions; need and challenges

September 13, 2017
Source: Kwasi Kyere l thebftonline l Ghana
Consolidation of microfinance institutions; need and challenges

Expected business combination deals by the microfinance institutions will largely define the success of the ongoing reform in the sector by the Central Bank, and prospect of recovery and image enhancement in the sector.

The ongoing reforms in the sector has built on certain cardinal pillars including enhancement of the quality of MFIs portfolio, financial sustainability, a healthy microfinance sector and also ensuring that the MFIs contribute to real economy. Since 2011 that the Central Bank stepped into affairs, there has been radical changes in the contextual and regulatory frameworks of the microfinance sector in Ghana.

The current reforms have been remarkably different both in its approach and perspective. First, the issues of increased capital requirement to GHS 2,000,000.00 and also emphasis on risk-based regulatory approach lies on quality of credit risk management, the amount of deposit that can be accepted and single obligor, alongside adequate capital has ensured MFIs are mandated to put in place mechanisms to identify, measure, monitor and control risk. MFIs are to report such mechanisms for review of their governance structure and operational issues.

The Central bank has provided the best practice guidance in the form of the prudential reporting using the ooses, the institution of credit bureau system, and the use of collateral registry as part of measures to foster the development of a good credit-based microfinance management. Poor credit management, it should be recalled was one of the microfinance failures as most MFIs piled up non-performing loans amidst dwindling capital base.

A major perspective derived from the Central bank approach is the reversal of modus operandi of the Ghanaian microfinance sector. Against the one size fits all commercial microfinance operations, the central bank allowed MFIs to specialize within the broad spectrum whole as well as geographical spread of operations, and each tier system determines the minimum capitalization. MFIs are now categorized into tier 2 deposit-taking institutions, tier 3 microcredit institutions, who are non-deposit taking and tier 4, which deals with the Susu collectors and money lenders. The extent of operations would determine the minimum capitalization. Also, MFIs are required to concentrate fully on core microfinance operations than fiddle with pure banking services and compete with them in terms of the sizes of loans they grant to their customers.

After extensive special industry audit by the Central Bank, it indicated over exposure by MFIs, huge non-performing assets insider abuses, corporate governance lapses and depleted capital base and the challenges surrounding the DKM saga, the bank of Ghana then came up with stringent procedures to address the issues. It also in this light that an Apex body is being rooted for, in order to make things smooth for MFIs and the Central Bank alike. It must be stated that clearly that despite the challenges facing the sector, their importance to the economy of Ghana cannot be over-emphasized. Providing financial and non-financial services to the poor, the productive poor and low-income earners is one of the better ways of growing our economy and ensuring financial inclusion and moving people into entrepreneurship. Microfinance is a novelty and if attention is paid to it with all the necessary help, there is no shudder of doubt that it will serve the poor and low-income earners who need micro loans to engage in smaller economic ventures and improve the financial sector.

While the central bank has driven the process so far, shareholders are now saddled with the responsibility of rounding off the recapitalization in line with the bank of Ghana, that shareholders will have unfetter opportunity to exercise their rights in the modification of the shareholding structures of their microfinance institutions. The issues of mergers and acquisition has been proposed for months now.


The core benefits that has continued to propel mergers and acquisitions as fastest corporate growth strategy lies in the creation of competitive advantage that leverage on the strength of the combining entities, while minimizing their weaknesses. The Global Economy has in recent times witnessed many voluntary business combinations from otherwise strong companies to further drive growth and returns. Many of these has reverberated in the Ghanaian market, in the banking sector, the insurance sector and many other sectors of the economy. Now access to capital is shrinking and this is likely to continue for some time. Consolidation makes sense in this scenario, and this is an immense potential within the microfinance industry.



Without mergers and acquisitions, many of the most well-known brands and companies would not be where they are today. Some merged companies are so successful we can’t remember a time when the two were distinct. Where would Disney be without Pixar, or J.P. Morgan without Chase?

At the same time, the history of mergers and acquisitions has had its fair share of failures. It’s sometimes shocking to discover why one company has suddenly disappeared after being acquired and run into the ground by another. Some of the most famous mergers are those that have lost billions, left executives plagued by their failures and even caused companies to go bankrupt.

Companies generally see for mergers when they have grown enough organically and they want to accelerate their pace of growth. Organic growth generally takes time and energy. According to BOG Report on Microfinance, in 2016 alone there was a marginal of 1.9% in total assets to GHS 1.3 billion compared to 30.3% in 2015. Leading MFIs have healthy balance sheets and strong net worth. Banks also lend to these larger MFIs without much hesitation. The current supply of micro-credit is very low. This translates into a huge scope for growth for the big players.

If the big microfinance companies want to maintain the extraordinary rates at which they continue to grow, inorganic growth is very essential. “The consolidation process of the Ghanaian microfinance institutions may begin very soon, and may become a norm in one to three years from now.  Consolidation would become necessary for MFIs which are large in size, while those smaller MFIs work at the grass roots level and hold the key to engage the borrowers. Here, the big MFIs would prefer to take over the district and semi-urban MFIs to get access. The challenges I foresee in the issue of mergers, is that can two struggling institutions merge and make strides? Is the typical Ghanaian owner willing to merge its business and loose some level of control? These are issues we need to address moving forward so that we can together share ideas and look at the way forward to save our industry and instill a higher level of confidence. I believe writing pieces like this is one of the sure way to help address these difficulties.


The Anatomy of a Merger

Generally, a merger is a combination of 2 or more companies into a single entity.  The company which buys another company is called ‘acquirer’ and the company which is bought is called the ‘target’. Both these entities generally look for synergy after a merger.  Some of the distinct advantages which can be realized by the MFIs after the consolidation:

  • Lower cost of funds
  • Sharing of IT and resources
  • Lesser time in acquiring clients
  • The ‘synergy’ effect
  • Economies of scale
  • Attain market share
  • Inorganic growth – easy entry into other regions, sectors, and client groups. Prima facia, these advantages look very good from the acquirer point of view. But these will come with many challenges for the acquirer firms. And given the fact that mergers and acquisitions across the globe have very low success ratios (about 80% have been unsuccessful!), MFIs which go for such an exercise will need to be extra cautious. Certain challenges which can be faced by Ghanaian MFIs include:



Valuation Issues/negotiation:

Since there is no single listed MFI in Ghana, the valuation exercise will be a real challenge. Conventionally valuations are arrived at by averaging the values obtained from three to four standard methods of valuations like DCF4, market multiples and option valuation5. Presence of some listed competitors greatly aids the process, which is not the case in the Ghanaian context. Sometimes, the failure of an acquisition to generate good returns for the parent company may be explained by the simple fact that they paid too much for it. Having bid over-enthusiastically, the buyer may find that the premium they paid for the acquired company's shares (the so-called "winner's curse") wipes out any gains made from the acquisition. The target MFI promoter will then have to hire a set of finance professionals whenever they aim for such an exercise. This will help in deciding the intrinsic value of the company and the appropriate market premium. 

It is observed in Ghana that to raise funds, institutions generally securities their portfolios and sell them. For example, the first microfinance deal in India was the acquisition of the microfinance operations of Jeevika Livelihoods Support Organization in Central India by Allahabad based Sonata in April 2007. Here the target offered its staff, clients and the portfolio for a premium. The premium was decided on various parameters like the cost spent on making clients, nurturing/seasoning them, geographical spread achieved, MIS, portfolio quality and the staff quality. Sometimes along with the premium other sweeteners are also included. In the above acquisition, Jeevika’s Executive Director joined the Sonata team as a co-promoter and had also been invited to be a member of its Board. 

Managing cultural differences between organizations:

It is widely recognized that cultural differences between the partners of a merger are one of the most common reasons for failure in mergers. This is greatly important. This may happen during pre-merger negotiations or during post-merger integration. Despite all due diligence, the two partners of a merger may fail to form a new successful unit that is able to exploit all synergies. Fostering an attitudinal and behavioral change throughout the new entity will take time.

MFI leadership will have to consult with stakeholders (Board, staff and clients) at all levels and build a consensus before change. The mergers might result in job losses, restructuring, and the imposition of a new corporate culture and identity which can possibly create uncertainty, anxiety and resentment among the targets’ employees. In short, the fundamental DNA of the MFI often changes.

Addressing culture when two companies integrate A rigorous program with clearly stated objectives should be put in place to address cultural integration. Too often, culture is presented as a wooly and soft topic. When that happens, executives tend to slight the issue. This can generally be avoided by linking the cultural program to measurable business results. There are several steps to doing this:

  1. Make culture a major component of the change management work stream. Often the main change management task during integration is providing "communications." This focus may minimize the importance of change management, when communication becomes reporting the decisions of others, belatedly, rather than driving actual decisions. If culture is recognized as a major challenge that the change management team is responsible for, then this team assumes an essential role in achieving integration goals. The change team needs resources whose numbers and caliber are consistent with enacting a critical role.
  2. Identify who "owns" corporate culture and have them report to senior management. Choose owners from both companies to the integration to allow for representation of all views, even in a takeover. These "owners" typically will be senior Human Resources or Organizational Development practitioners. This is also an appropriate task for outside assistance, given the value of external insights in identifying culture. To drive home the importance of the issue, culture should be on the agenda of regularly scheduled (monthly/biweekly) Steering Committee meetings.
  3. Insist that the cultural work focuses on the tangible and the measurable.

The Steering Committee should reject soft, vague, and poorly defined presentations of culture. Instead, culture owners should be required to discuss issues that are specific, well defined, and supported by specific examples that can be tied to business results. This is the difference between culture being addressed by general exhortations to enact "teamwork" and being addressed by analysis and interventions to increase measurable collaboration among the members of, for example, the new company's merged sales force. If the culture program focuses on whether members of the sales force are effective in selling the products of each other's companies and removing the barriers to doing so, that will be a more substantial contribution than a culture effort that creates communications to inform the sales force about the desirability of teamwork.

  1. Consider the strengths of both existing cultures, not just the weaknesses.

When two companies merge, the assumption is often made that they should take the "best" of each company’s culture and integrate them, much like creating a "Best Of" CD from a band's previous recordings. Would that be mixing cultures were as simple as sequencing tracks on a mix CD! Corporate strengths are sometimes incompatible. Solid, more mature companies often acquire start-ups as a means of adding products to their portfolio. What they often find is that the structural controls and well-defined processes that are a hallmark of predictable performance for the acquirer may be impossible to mix with the less structured ways of the start-up. A more varied integration than a simple addition of desired qualities is required.

One means to help achieve this is to retain separate core capabilities where possible. For example, in the HP-Compaq merger, the merged company kept HP's strong Printer Division with minimal change, but integrated its sales force along the Compaq model, which was judged to have been more effective. Each legacy company's culture was allowed to dominate on a by-function basis. Where the cultures are different, there should be an assessment of whether the elements can be integrated. When the integration is problematic, choices to act should focus on the relationship between cultural assumptions and business results. Only address those cultural issues that are critical to the business. Make an explicit connection between both business and personal achievements and any changes in (cultural) assumptions that people are asked to adopt.

  1. Implement a decision-making process that is not hampered by cultural differences.

Decision-making style is often deeply ingrained in a company’s culture. However, few things have a greater impact on integration results than the ability to make speedy decisions. Customer and employee loyalty can erode quickly if a company is perceived as unable to reach decisions. Leaders of integrating companies find themselves thrust into a situation where they have to make decisions quickly. While varying decision-making styles may hamper this, the differences among decision-making styles are often less important than the difference among these styles and the decision-making style required for an effective integration. This is an urgent matter.

The leaders of the integration project must address this with the support of the culture team by:

Identifying decision-makers for each area of the

  • integration. Understanding the decision-making style of each
  • company both in terms of what the style is and the assumptions, processes, and structures that support that style. Use this as a basis for assisting decision-makers in moving beyond their assumptions to a point where they can act effectively. Communicating expectations to those decision-makers,
  • including the deadlines when decisions are required. The demand for speed can be used to force changes in how decisions are made. Specific techniques can be used to support this, such as encouraging 80/20 decision-making rather than complete certainty before a choice is made. The three steps outlined above are a starting point for culture change in the critical area of decision-making.

In the integration of HP and Compaq, leadership had to address the tendency of engineers to base decisions on careful analysis of large bodies of data and the cultural assumption that a request for more data is a legitimate reason to delay a decision. Integration teams were introduced to the concept of "adopt and go" — a method of limiting analysis to currently available data and options. "Adopt and go" emphasizes action, not analysis. The term was heard frequently during the integration, describing the new decision-making approach that the integration teams had embraced.

Arrange Funds for Buying Target

Generally, the source of funds for the acquirers are the internal accruals or borrowing from banks (in case of an all cash deal). Considering the fact that microfinance is a relatively new field, bankers would be reluctant to fund such deals.  Microfinance sector has not yet gained full acceptance in the banking community though the future is very promising. Furthermore, banks lend to MFIs to achieve priority sector lending norms and financing buyouts will not achieve this!

Clash of Management Styles/ego Management styles tend to differ across firms.

When older managers are replaced by newer ones, the difference in dealing with ground level staff, the performance appraisal systems, the ego clashes of senior managements etc. are all smaller issues which look very trivial on the outset, but can develop into very significant issues. If this issue is not tackled well enough it can grow into a giant that will impossible to tame, and its rippling effect will be damning.


Having discussed the caveats of consolidation of MFIs, if done properly, the synergies are excellent. In an environment where high premiums are paid, stakeholders expect significant synergies from their transactions. Success, then, comes with a holistic approach where the “people” aspects are viewed as an integral part along with the normal focus on financial performance, for one cannot exist without each other. It is the effective handling of this delicate balance which actually determines success. 

You’ve now been educated on examples of successful and unsuccessful corporate mergers and acquisitions. Sometimes joining forces makes perfect sense and they reap the rewards. Other times it can be too good to be true, ending in despair.

It’s clear that business leaders have a difficult job in making strategic decisions to drive the future of their respective companies.


The writer is the chief executive officer, Star Alliance Microfinance Limited

Accra. Phone; 0302-631635, 0209345895. Kyerekwasi@Yahoo.Co.Uk